There's been a lot of rumors circling about a $1,000 dollar iPhone coming out this fall. Indeed, Apple (AAPL -1.02%) announced the new iPhone X at its first event at the Steve Jobs Theater on September 12, and its starting price is $999.
What's getting less attention is that Apple announced the iPhone 8 (the successor to the iPhone 7) will start at $699. That's a $50 price bump from the iPhone 7's starting price last year. While consumers will receive double the storage space for that price, there's no option to pay less.
The higher starting price, combined with sales of the iPhone X later in the fall, should result in the highest average selling price for iPhone ever. The number peaked at $695 in the first quarter of 2017. Considering many analysts expect a lot of iPhone users to upgrade their devices this year as part of a "supercycle," it could result in significant revenue growth for Apple.
Image source: Apple.
The value of increasing average iPhone sales price
While Apple is bumping up the storage capacity of the base model and providing a bunch of new features with the iPhone 8, Apple's costs for both are relatively small, especially when spread across millions of devices. With the $50 price bump ($30 bump for the iPhone 8 Plus), Apple should see an increase in its gross margin for the iPhone.
Considering the percentage of Apple's revenue that comes from iPhone sales, gross margin expansion should translate into a nice increase in net profit. Bernstein's Toni Sacconaghi estimates a $10 increase in iPhone average sales price would translate into a $0.14 increase in earnings per share next year.
Data source: Apple quarterly reports.
After introducing a higher-priced, but more differentiated iPhone 7 Plus with a better camera, Apple was able to increase its iPhone ASP around $5 to $15 in each of the first three quarters of fiscal 2017. The price increase for the iPhone 8 should result in an even bigger bump next quarter, likely breaking through the $700 average selling price. On top of that, limited sales of the $999 iPhone X (it's expected to be in short supply and doesn't launch until November) should provide a smaller bump to ASP, but sustain the ASP increase through the second quarter.
The importance of iPhone
It's no secret that iPhone is Apple's biggest revenue generator. But it's still impressive just how much revenue the iPhone accounts for. Over the last four quarters, iPhone accounted for 63% of revenue.
Perhaps just as importantly, iPhone helps contribute significantly to Apple's growing service revenue. The device accounts for the vast majority of Apple devices in use, and likely an even greater percentage of time spent. As the total number of iPhones in use continues to grow, so do Apple's services sales, which include App Store downloads, iTunes downloads, and AppleCare. Services are one of the biggest profit growth drivers for Apple going forward.
The price increases could negatively affect unit sales and service revenue by association, but it's worth noting a couple of factors. First, Apple doubled the storage on the base model iPhone 8 to 64 GB. Second, competing high-end phones like the Samsung (NASDAQOTH: SSNLF) Galaxy S8 are still more expensive than the iPhone 8. Samsung's flagship phone starts at $749 at all of the major U.S. wireless carriers.
As consumers hold onto their phones longer, price increases have been a successful way to increase revenue even as unit sales growth slows. Samsung's Galaxy S8 and S8+ smartphone sales increased 15% over initial sales of the Galaxy S7. That's partially due to the price increase Samsung made, but also due to increased unit sales. If Apple can manage to sell the same number of units of the iPhone 8 as the iPhone 7, it'll see somewhere around a 6% increase in sales from the price increase alone. Increasing unit sales, as most analysts expect to happen, should drive revenue growth into the double digits.
